Monetary Policy’s Instruments in Vietnam: Basis and ...

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Volume 1. Issue 2. July 2019

ISSN 2603-5324

http://faba.bg

Monetary Policy’s Instruments in Vietnam: Basis and Evolution in A Difficult

International Financial Context

Quang Nguyen

University of Picardie, France

Info Articles

________________ History Articles:

Submited 12 March 2019

Revised 30 April 2019

Accepted 1 July 2019

________________ Keywords:

Monetary policy;

Reserves Requirements;

Interest rate; Open-

market operations;

Emerging market;

Inflation targeting;

Vietnam

Abstract

___________________________________________________________________

This work provides an overview of the evolution of monetary policy in Vietnam in the

years following the changes in the Vietnamese economy in 20 years, through two

periods with two financial crises (1997 Asian financial crisis and 2008 financial crisis).

This work also includes a synthesis of the theoretical and empirical research of

Vietnamese authors on the subject of monetary policy analysis in Vietnam. In addition,

this study aims to understand the change in monetary policy in Vietnam, the socialist-

oriented economy, lower middle-income emerging economy, through the adjustment of

the instruments that have been developed by the Central Bank of Vietnam. In this

period of study, analyses can show to what extent reforms can explain why monetary

policy developments are intended not only to stabilize the macro-economy and ensure

strong economic growth, but also to address one of the biggest problems in the

Vietnamese economy, inflation. Address Correspondence:

CS 52501 80025 Cedex, Chemin du Thil, 80025 Amiens, Prancis

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019)

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INTRODUCTION

After 40 years of reunification (the victory

over the United States in 1975) and 30 years

after the reforms (the Doi Moi policy -

Renovation in 1986), Vietnam is considered a

success story in the development process, with

great achievements made in recent years, as well

as great development potential in the future.

Major organizations such as the United Nations

(UN), the World Bank (WB), the Asian

Development Bank (ADB) and also the

American Financial Group Bloomberg have

addressed this development. The progress made

in recent years has been driven mainly by

sustained economic reforms, integration into the

global economy and an environment of

macroeconomic stability.

After the period of hyperinflation (see

Figure 1), since 1990, its GDP has been

multiplied by about 3 times, the GDP growth

rate per year has reached 5.7%. Since 2000, after

learning from the experience of the slightly

negative effects of the Asian financial crisis1, the

economy has seemed to be recovering with

stable economic growth averaging 8% per year,

a level that was surpassed only by China in Asia

and continued to grow until the global economic

crisis of 20082. However, since 2007, and in

particular the 2007-2008 Global Financial Crisis,

Vietnam has been experiencing macroeconomic

instability. The GDP growth rate has declined

sharply while the inflation rate has reached

double-digit values (Pham, 2016).

Recent studies have provided evidence

that a malfunctioning monetary policy may have

contributed to the slowdown in economic

growth. The Vietnamese government and the

central bank appear to have maintained

traditional approaches to monetary policy

management, although Vietnam's economy has

become more open and better integrated into the

1 See Hochraich D. (1998), "Financial crisis and competitiveness in Asian countries, beyond the monetary crisis” in CERI studies, Fondation nationales des sciences politiques, Paris 2 Pham, T. A. (2016), pg. 3

global economy with Vietnam's accession to the

WTO in 2007. Conceptual developments and

further theoretical analysis can provide insights

into the effectiveness of monetary policy

management in dealing with external shocks.

Figure 1. GDP Growth and Inflation in

Vietnam in the period of hyperinflation (1980-

1989)

Source : Pham, T. A. (2016), p. 12

In order to stabilize the macroeconomic

situation and control inflation, the monetary

policies of the Central Bank of Vietnam are

adjusted, by instruments, according to the real

financial situation on the market, in particular

after the Asian crisis of 1997 and after the global

financial crisis in 2008. In the context of

developments in Vietnam's economic and

financial sector, the results of the theoretical

analyses presented in this paper are

demonstrated on the basis of the reforms of the

instruments based on the data in the two periods

(1998 - 2007 and 2007 - 2018).

The rest of the document is organized as

follows. Section 2 presents the literature review

on the subject. Section 3 provides a brief

overview of monetary policy in Vietnam.

Section 4 describes the management of the

financial instruments of the Central Bank of

Vietnam over two different periods. Section

5concludes the document.

Review of the litterature

Monetary theories often focus on different

factors and relevant policies will reflect the

platforms of theory. To decide how the different

policy instruments are used, regular policy

makers must evaluate the time and effectiveness


128

of economic policies through experimentation.

The problem of monetary theories in the

economy is often controversial. For example,

some assumptions about the effects of monetary

problems are based on real economic growth,

while others attempt to reject it and do the

opposite. In addition, the effectiveness of

monetary and fiscal policy is the subject of a

long debate. The conceptual foundations of

monetary policy are often mentioned by: (1)

Quantitative money theory3, which shows that,

in the long run, money supply does not depend

on GDP, but on price changes or changes in the

general price level. The arguments also show the

importance of the speed of money supply

growth. This theory can also be considered the

first recognized theory of how monetary policies

affect the general market price through changes

in the money supply. (MV = PV); (2) Traditional

Keynesian theory4, the main argument of the

theory is that employment is mainly determined

by consumer demand. This is completely

different from the arguments of the neoclassical

school of economics where the price of labour is

the key factor determining employment. Hicks

(1937) and Hansen (1953) explained the effect of

monetary adjustment in macroeconomic theory

of Keynesian theory by the IS-LM model. This

model is based on the relationship between

interest rates and real output, showing the

balance of the market for goods and services.

The model is also used in money markets, but

only when the economy is closed; (3) Mundell

(1963) and Fleming (1962)5 developed a model

3 See Fisher, I., & Brown, H. G. (1912), “The purchasingpower of money”, 2006 édition, Cosimo Classics. 4 See Keynes, J. M. (1936), “The General Theory of Employment, Interest, and Money”, United Kingdom: Palgrave Macmillan.

5 See Mundell, R. (1963), “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates”, The Canadian Journal of

Economies and Political Science /Revue canadienne d'Economique et de Science

politique, 29(4), 475-485.

that could be used in an open economy. This

model is also known as the IS-LM- BoP model.

It is often used to describe the short-term

relationship between nominal exchange rates,

interest rates and output in an open (developing)

economy. The Mundell-Fleming model is often

remembered for the argument that an economy

cannot simultaneously maintain an independent

monetary policy with fixed exchange rates and

free capital flows (Mundell-Fleming Trilemma);

(4) Phillips' Curve6, by British economic studies

from 1861 to 1957, William Phillips (1958)

found an inverse relationship between monetary

wage changes and unemployment. Samuelson

and Solow (1960) used Phillips' results to apply

the relationship between the inflation rate and

the unemployment rate to the United States.

Samuelson and Solow argue that inflation and

the unemployment rate are inversely related,

constructing the famous Phillips curve, in order

to argue that to consolidate employment, it is

necessary to keep the inflation rate at its fair

value. However, the recent Phillips curve is no

longer very applicable because many studies

have been conducted with data from different

countries showing that there is no clear

bidirectional impact between inflation and

growth. In the 1990s, the Phillips curve also

gave it an error through studies such as those by

Barro (1995) and Fischer (1993), which show

that inflation remains high while economic

growth is low; (5) Monetarism7, represented by

See Fleming, M. (1962), “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates” Staff Papers (Vol. 9, pp. 369-380), International Monetary Fund.

6 Phillips, A. W. (1958), “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom”, 1861-1957,

Economica, 25(100), 283-299.

7 Cf. Friedman, M. (1948), “A Monetary and Fiscal Framework for Economic Stability”, The

American Economic Review, 38(3), 20.

Friedman, M. (1963), “Inflation: Causes and Consequences”, Proquest/Csa Journal Division.


129

Milton Friedman, who praised the importance

of monetary policy for fiscal policy. The

arguments put forward in this school often argue

that changes in money supply have a major

influence on national production in the short

term and on the general price level in the long

term. Since then, money economists have often

stressed that, in order to conduct monetary

policy properly, it is necessary to control the

money supply in circulation (Friedman, 1948).

Returning to the case study of monetary

policies in the Vietnamese market, we can see

that before the 2000s, there was a lot of

theoretical and empirical research. However,

these studies are more descriptive arguments by

comparing past and current data and analyzing

proposed economic objectives and prospects for

Vietnam's future (Tran & Vuong, 2009). The

study of monetary policy during this period is

usually conducted by foreign economists such as

Fforde et De Vylder (1996), Oudin (1999) or

Riedel and Turley (1999). However, these

studies do not deal in depth with the objectives

of monetary policy, but most of them deal with

issues related to Vietnam's macro economy. In

particular, during this period, the Vietnamese

economy was gradually moving from a

subsidized to a market-oriented economy.

Research analyses are often focused and

developed on policy of Doi Moi (Renovation)

and trade balance recommendations.

In the period following the 2000s, in

particular Vietnam's accession to the WTO in

2007, in addition to the great benefits of

economic openness and integration into the

world economy, Vietnam also faced significant

challenges and difficulties due to the global

economic crisis. Vietnamese economic experts

and policy makers have become considerably

aware of the direct link between financial crises

and monetary policy. As a result, more and

more studies are focusing on central monetary

Friedman, M. (2001), “One World, One Currency Options Politiques”, Institute for Research on Public

Policy.

policy issues, using not only theoretical

arguments but also empirical models. However,

the above studies have focused on specific

monetary policy issues, but do not cover the

overall objectives constructed in financial

markets. In addition to the relationship between

macroeconomic factors (such as economic

growth), issues such as inflation rates, exchange

rates or credit management are often the most

important. There have been many analytical

studies on the exchange rate problem. In Vuong

and Ngo's study (2002), which focused on the

period during and after the 1997 Asian financial

crisis, the VAR model demonstrated that

Vietnam's monetary value can be maintained by

adopting a parallel exchange rate regime.

Following the May study (2007), in the context

of macroeconomics in times of global economic

crisis, the author argued that Vietnam applies a

flexible exchange rate regime instead of a fixed

exchange rate regime. The author made the

above argument after conducting a

comprehensive study of the exchange rate

regime using an optimal monetary theory. In

addition, Nguyen, T. P. & Nguyen, D. T. (2009)

also concluded that mismanagement of the

exchange rate regime can lead to a decline in the

efficiency of the exchange market in the

economy. The problem of real exchange rate

adjustment has also been the subject of empirical

studies. Nguyen and Kalirajan (2006), exports

can be stimulated and the balance of payments

current account can be improved if the dong is

devalued. Through his research, the author also

shows that dong devaluation can reduce the real

exchange rate in the short term. Maintaining the

stability and competitiveness of real exchange

rates is also central to the results of the study

conducted by Le (2007).

In addition, many studies have been

conducted on inflation as part of the analysis of

monetary transmission channels in Vietnam.

These analyses often focus on the causes and

consequences of inflation on the economy.

Studies often show that the cause of inflation is

often explained by credit, studies also show that

the money supply does not significantly affect

inflation. Given the empirical results of the


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IMF's research with a six-quarter delay8, money

supply growth explains only about 10% of the

inflation rate and the effect will decrease over

time. By researching Bhattacharya (2013), the

results show that credit growth has a positive

effect on inflation for the economy with a lag of

more than a year (using data from 19992013),

the study does not, however, show the

relationship between inflation and money supply

in Vietnam. Similarly, using quarterly data from

1996-2005, Le & Pfau (2009) showed that the

cause of inflation does not come from M2 after

the econometric model was applied. In addition,

the results of the analysis during this period also

showed that counterpart credit had a significant

impact on the CPI. This study also shows that

the government and the State Bank manage the

injection of liquidity into the market through

credit channels (analysis of variance with an

eight-quarter lag), credit accounted for 23.08%

of output’s shocks, while the money supply

represented only 9.51%9. Camen (2006) also

gave the same results. Thanks to the VAR model

and the analysis of variance forecasts for the

period 1996-2005, credit explains 18% of

inflation, while the key rate plays no role10. In

addition, Camen concluded that Vietnam's

inflation rate was explained by both commodity

prices and exchange rates. Similarly, the role of

exchange rates on inflation is also important for

Goujon, he explained in his research by

analyzing the effects on the macro economy in

the 1990s. The results of this study show that the

inflation rate will increase by 1% when the

exchange rate is depreciated by 2%. This

suggests that, in order to control the inflation

rate in Vietnam or to increase the money supply,

the author proposed to control the exchange rate

as well as money market prices. In their study,

however, Vo et al. (2002) showed the opposite

8 See International Monetary Fund (2003) ‘What drives inflation in Vietnam? A regional approach”, IMF Country Report N° 06/422. In Vietnam: Selected Issues. Washington, DC, USA: International Monetary Fund 9 See Le V. H., & Pfau, W. D. (2009), p. 175 10 See Camen, U. (2006), p. 247

when they assumed that exchange rates and

money supply changes had only a very small

effect on inflation rates. The arguments in this

study were then rejected in 2010 by the results of

Nguyen, T. T. T. H. & Nguyen, D. T. The two

authors showed the important impact of

exchange rate depreciation on inflation rates,

although they consider inflation to be a problem

originating in the national economy.

In addition, studies on the analysis of the

monetary policy framework were also conducted

for the Vietnamese economy. Tran (2005), using

the VAR model, presented the results and the

relationship between the world price of gold and

the price of gold in Vietnam by analyzing the

growth of the money supply adjusted by the

central bank in response to price and exchange

rate changes in the money markets; this study

also shows that, by controlling interest rates, the

central bank can hardly control public demand

for gold. In the study of the monetary policy

transmission mechanism by V. H. Le and Pfau

(2009), the role of credit channels and exchange

rates is increasingly reinforced rather than the

role of interest rates in Vietnam. A. T. P. Le

(2007) showed that strict inflation targeting in

the Vietnamese market is not necessary, as it

places inflation targeting above other monetary

policy targets.

After all, when analyzing the monetary

framework, studies focus almost exclusively on a

specific objective using econometric methods

such as VAR or VECM models, but there is no

generalized aggregation for all targets.

Overview of monetary policy in Vietnam

State Bank of Vietnam (SBV)

“The State Bank of Vietnam (below referred to

as the State Bank) is a ministerial-level agency of the

Government and the central bank of the Socialist

Republic of Vietnam”11

After the Sixth Congress of the

Communist Party of Vietnam, the economy

11 Article 2. Position and functions of the State Bank of Vietnam, Law on the state bank of Vietnam, the national assembly, n° 46/2010/QH12


131

moved from a planned to a state-regulated

market economy. We must resume the first step,

the construction and reform of the operational

organization of the banking system, which

focused on monetary policy.

Since 1990, two banking ordinances have

been adopted (SBV’s Ordinance / Commercial

Bank, Credit Union and Financial Corporation

Ordinance), the country has followed the East

Asian "developmental state" model with the

transition of Vietnam's banking system from one

level to two levels12. The objective is to promote

and ensure sustainable economic development

through structural changes in the production

system and a high rate of economic growth (Le,

2007). It clearly defines the functions of

government management for the SBV and the

functional currency of credit institutions' activity

(acclimatized to the market economy banking

system).

In October 1998, two banking laws were

replaced by two new ones: the Law on State

Banking and the Law on Legal Credit

Institutions. These two laws have contributed to

the proper functioning of the banking system,

which has become freer, more open and more

compatible with major changes in the banking

sector13.In terms of many aspects of the

organization and implementation of monetary

policy in Vietnam, the power of the State Bank

is quite limited. In general, important monetary

decisions are governed by the National

Assembly, the government and the National

Monetary Policy Advisory Council. On the

other hand, the State Bank must prepare an

annual report on the activities to be carried out

in the context of the implementation of

monetary policy in the past, as well as

suggestions for future economic development.

The government, after receiving the report, may

make changes and amendments in consultation

with the National Monetary Policy Advisory

12 Further analyses are mentioned in the article Lich sử Ngân hàng Nhà nước Viêt Nam (History of the Central Bank of Vietnam) on the official SBV website (see Bibliography) 13 Law on the State Bank of Vietnam (1997)

Council, which is then transmitted to the

National Assembly for final approval. The

Congress will normally approve the forecasts

according to different objectives, such as the

State budget or the economic growth objective.

After receiving final approval, the State Bank

may conduct monetary policy activities related

to the development of the financial market and

may adapt accordingly; however, the Bank may

report periodically to the govemment and the

National Assembly (Camen, 2006; National

Assembly of Vietnam, 1997). Consequently,

from a legal point of view, the role of the State

Bank is quite limited, while the government's

intervention is quite strong in the

implementation of monetary policy in Vietnam.

Before the real volatility of inflation,

economic growth became difficult. To improve

the operational effectiveness of macroeconomic

policies, the Ministry of Finance and the State

Bank of Vietnam (SBV) signed the Coordination

and Information Exchange Regulation

(29/2/2013). Subsequently, four government

agencies, such as the Ministry of Planning and

Investment and the State Bank, the Ministry of

Finance and the Ministry of Industry and Trade

also signed the Regulation on Coordination in

Macroeconomic Management and Direction

(12/01/2014).

Coordination between fiscal policy and

monetary policy only arises when both policies

are implemented by two independent

organizations. In the case where one

organization depends on the action of the other

organization, or under the direction of another

organization, it has the natural consequence that

mutual coordination of organizations is

necessary in the implementation of policies. In

practice, in Vietnam, monetary policy was

carried out by the central bank, which gradually

became independent of the functioning of fiscal

policy.

Monetary policy objectives in Vietnam

Monetary policy has been identified

through the construction of a specific policy,

price stability. On the other hand, they are credit

policy (tools for mobilizing capital and


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extending loans to all economic sectors); central

bank independence to overcome the "inflation

bias" (Bordes, 2007), implementation of positive

real interest rate policy, interest rate adjustments

in line with inflation volatility; exchange rate

policy and a number of other support tools.

In Vietnam, three monetary policy

objectives are commonly set: inflation, economic

growth and a balanced state budget. The process

generally proceeds in the following order: (1) the

government determines, implements and directs

monetary policy and determines the amount of

liquidity injected into the economic market; (2)

the National Assembly oversees the

implementation of monetary policy; and (3) the

government has an obligation to report

periodically on the progress of monetary policy.

In addition, other monetary policy

objectives are also pursued by law. According to

the 1998 Law on the State Bank of Vietnam, the

SBV’s mission is to stabilize the value of the

currency, ensure the security of the banking

system and facilitate socio-economic

development (Kovsted et al. 2002). Moreover,

the relationship between nominal exchange rates

and domestic prices is still closely linked (Le,

2007). The importance of this link is evident in

the difficult period before the implementation of

the Doi Moi policy in 1986. It was at this time

that Vietnam faced hyperinflation and a sharp

drop in the exchange rate on the financial

market. Compared to many developing

countries, Vietnam has always focused on the

objective of curbing inflation through its

experience with hyperinflation and public

sensitivity to market price fluctuations.

Subsequently, the Central Bank of Vietnam

carries out more efficient operations,

demonstrating the role of management through

the promulgation and finalization of

mechanisms, policies and administration of

policies that work effectively. The innovative

organization of the banking system has made a

pact with science. The strengthening of the state

commercial banking system, the development of

international relations and construction

regulations make it possible to set up and

manage the credit institutions' system. Monetary

policy construction and operation then becomes

more comprehensive and efficient, helps to curb

inflation, and gradually stabilizes the value of

the dong.

In the early 2000s, Vietnam's economic

growth increased significantly thanks to the

implementation of an accommodative monetary

policy and fiscal stimulus, but the Vietnamese

government seems to have failed to achieve the

economic growth target in this period. The

average economic growth from 2001 to 2007

reached 6.94%. This ratio fell by 1.06 percentage

points in the period 2008-2015. Meanwhile, the

average inflation rate from 2008 to 2015 was

4.32 percentage points higher than the period

from 2001 to 2007.

Figure 2. GDP Growth and Inflation in Vietnam (1997-2018)

Source: GSO, private calculations

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Inflation, consumer prices (annual %) GDP growth (annual %)


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Through the analysis of economic policies

in Vietnam, the fact is that economic growth is

the government's main objective (To et al.,

2012). Normally, the State Bank is responsible

for developing the monetary policies necessary

to achieve the objectives set. In addition, the role

of the State bank is to control nominal exchange

rates, monitor liquidity pumping and provide

credit to the economy. The State Bank's

objectives are generally published each year at

the same time as the government's economic

objectives. For example, in 2017, the

government set an economic growth target of

6.7% and an inflation target of less than 4%. At

the same time, the State Bank has also set a

target that the exchange rate should not increase

by more than 2% and that the M2 should

increase by only 3.9%. It can be seen that the

role and objectives of the government and the

Bank are often controversial, they can be

discussed and analysed by Vietnamese

economists to reflect conflicts and make

recommendations for the future in terms of

economic benefits (Pham, 2011).

In 2015, Vietnam's economy grew at a

higher rate. The inflation plan has been kept at

very low levels (in 2015, average annual

inflation growth was 0.63% to 6.68%). This is

the result of the economic governance efforts of

government agencies. They have been working

to repel the effects of the "shock" both inside and

outside the economy over time, especially since

the global financial crisis of 2007-2009.

According to GSO reports, Vietnam's

GDP growth in 2018 was 7.08%, its highest level

since 2008, while inflation remained below 4%.

This result shows that the Vietnamese

government has learned lessons, it partly reflects

the synchronization achieved between the SBV

and the Vietnamese government14.

Management of monetary policy’s instruments

Period from 1998 to 2007

14 GSO Annual Report (2018)

In this phase, the objective of monetary

policy was to stabilize the macro-economy and

ensure strong economic growth. Increasing the

pace of development was the main objective of

this phase. Macroeconomic objectives imply in a

broader sense that the control of the target,

economic stability, uneven growth over the year,

and the inflation fluctuation ratio are not too

high. The aim was to achieve the balance of

payments from shortage to equilibrium and

eventually to surplus. In particular, it was

necessary to ensure a balanced budget, in

particular, to increase revenues and reduce

operating expenses in order to concentrate

public investment.

The interest rate: this period is marked by

a fundamental change in the management of

interest rates, so that they can be adapted to the

pace of Vietnam's economic reform. SBV

managed the interest rate policy through a

maximum interest rate cap under the loan term.

Interest rate caps and the interest rate differential

have been announced. Commercial banks

applied some flexibility to adjust interest rates

for loans and deposits that corresponded to the

characteristics of capital and trade in particular.

The interest rate mechanism made fundamental

changes starting in May 2000.

Reserves requirements: under the reserve

requirement for regulations issued under SBV

Decisions No. 1991/1999 / QD-NHNN1 1997,

the reserve requirement ratio for credit

institutions has been decided (6% for short-term

and demand deposits; 6% for medium and long-

term deposits). Interest must also be paid for

excess reserves, as well as penalties if credit

institutions do not have the mandatory reserve

account. These rules encourage credit

institutions actively operating in the company's

capital. They implement the stipulated required

reserve, a consistent operational target for

monetary policy.

Refinancing: through mortgage

documents and mortgages in commercial banks'

foreign currency deposits, the central bank

carried out the short-term refinancing to

compensate for the temporary payment

difficulties of commercial banks. In 1998, the


134

refinancing interest rate can be adjusted from 1%

to 1.1% per month. In 1999, when there was the

interest rate reduction, the refinancing ceiling

was lowered to 0.85% each month.

Open-market operations: these are carried

out on 12 July 2000. The market opening date,

chaired and inaugurated by the central bank on

the occasion of the first session. Market tools are

now functional, they are considered the most

important tools of monetary policy, because they

have more advantages than other tools. They

allow the central bank to actively operate a

flexible monetary policy. Consequently, the

application of open-market has marked an

important development in the management of

the central bank's monetary policy, moving from

the use of rigid administrative tools to flexible

and more efficient tools.

The credit limit: giving the credit line will

generate difficult factors for commercial banks.

Although this tool has been applied since 1994,

its impact on performance was only observed in

the second quarter of 1998, but the central bank

did not apply this tool as a routine tool in

monetary policy management.

Period from 2007 to 2018

The economic context is more broadly

and deeply integrated into the global economy,

leading to faster trade development and the

inflow of international capital more rapidly and

intensely. Thus, the construction and operation

of monetary policy becomes more complex and

difficult. A flexible monetary policy is

implemented through the adjustment of the tool.

More precisely15:

Interest rate: from May 2007 to June

2008, the central bank raised the key interest rate

in order to absorb the excess liquidity caused by

strong foreign capital inflows. In late 2008 and

early 2009, when inflationary pressure eased, the

central bank also reduced the policy rate to

support economic growth.

15 The data and number in the analyzes are taken from the annual reports of the Central Bank of Vietnam

Between 2009 and the first quarter of

2010, the central bank carried out the base rate

mechanism under which banks set the deposit

and lending rates to VND. It was not to exceed

150% of the base rate. In 2011, to adjust interest

rates, the central bank gradually increased the

operator in order to implement a restrictive and

prudent monetary policy, but also to fight

inflation.

In 2012, on the condition that inflation

forecasts were on a downward trend, the interest

rate tool was actively used. The downward trend

had to be followed online by reducing inflation

and inflation expectations. It was necessary to

ensure that the real interest rate was positive, in

order to prevent a further increase in inflation.

Recently, due to the excess liquidity of

commercial banks, from March 2014 to today,

the refinancing rate is 6.5%, which is much

lower compared to the 15% at the end of 2011

and the rediscount rate of 4.5%.

Reserves requirements: thanks to monetary

policy, the refinancing rate has been better

controlled, in line with the objectives and

monetary developments of each period. In 2007,

in order to neutralize excess liquidity in the

banking system, alongside open market

operations tools, the central bank raised the

percentage of the reserve requirement ratio for

commercial banks in mid-2007 and early 2008.

At the end of 2008, the central bank lowered the

RRC to reduce liquidity pressures for banks,

which reduced funding costs and encouraged

banks to raise capital and loans. In particular,

the reserve requirement ratio for VND deposits

declined rapidly from 11% in mid-2008 to 3% in

the first quarter of 2009. It is still at 3% at the

moment. The reserve requirement ratio for

foreign currency deposits declined more slowly,

from 11% between 2008 and 4% in 2010. Since

September 2011 until today, it has been

maintained at 6%.

Open-market operations: since July 2000,

open-market operations have been constantly

being developed. They have become a tool for

currency regulation, mainly through SBV. Since

2007, the tendency of the foreign currency to

circulate in Vietnam has increased, which can


135

cause the currency to devalue. The central bank

increased foreign exchange reserves in order to

stabilize the exchange rate. If in the period from

2008 to 2009, the deadline for long-term

securities mainly offer 7 and 14 days. During the

first 3 quarters of 2010, the 4% interest rate

subsidy for short-term loans expires, so the

central bank increased the purchase term by an

additional 28 days to support banks' liquidity,

allowing them to reduce market interest rates

and continue to support economic growth.

The exchange rate: the exchange rate tool

has been significantly adjusted to reflect as

closely as possible the pace of supply and

demand in the exchange market, as a basis for

improving market regulation. In the period

before 2011, the exchange rate was still under

pressure and the foreign exchange market was

unstable in January 2011. The central bank had

revised the marginal rate to 9.3%, while there

was a narrow negotiating margin between +3%

and +1%. After that, the central bank

implemented flexible market intervention to

stabilize the exchange rate, which helped to

reduce dollarization.

In 2012 - 2013, the central bank aims to

control the increase in exchange rates within the

limit of 2 to 3% per year with the aim of

controlling the possibilities of a devaluation of

the Vietnamese currency. Moreover, it has also

created favorable conditions for companies

active in the preparation and implementation of

a business plan. In June 2013, thanks to SBV's

operating practices, the exchange rate was only

adjusted by 1%.

In September 2014, the central bank

adjusts the exchange rate to only 1% and it will

remain so until the end of the year. In 2015, due

to the volatility of the global economy, the

adjustment of the renminbi (yuan) exchange rate

by China and the interest rate adjustment by the

US Federal Reserve (FED) at the end of 2015,

the volatility of exchange rate pressure in

Vietnam was quite high. The SBV devalued the

value of the VND three times in 2015 (January,

May and August) with an adjustment of 1%.

With the devaluation of the local currency in

May 2015, due to the strong pressure due to the

devaluation of the yuan, the State Bank of

Vietnam adjusted the rate from +- 1% to +- 2%

on 12/8 and from +- 3% on 19/8.

Other tools: after a long period of floating

interest rates, the central bank reused the wear

rate to limit its cap that could cause fluctuations

in money market liquidity. The central bank set

the cap at 12%/year in May 2008 and adjusted

the cap to 14%/year from March 2008. This cap

was lowered by the central bank when the

inflation risk came under control. On 29 October

2014, in accordance with Decision No. 2173 /

QD-NHNNN dated 28/10/2014, the SBV set

out the provisions mobilizing the ceiling on

demand deposits (from 1 to 6 months) at 5.5%

and 1% for deposits of less than 1 month.

In addition, during this period, in order to

help control credit growth and to contain

inflation, the central bank asked commercial

banks to control credit growth and associate it

with credit quality. In addition, the central

bank's monetary policy has actively collaborated

with fiscal policy to attract capital by

transferring about VND 50 trillion from central

bank cash deposits. Since 2009, expansionary

monetary policy measures have prevented the

risk of recession. The central bank has put in

place programs to support the interest rate at

4%, as indicated by the government for all loans,

which has helped to eliminate difficulties for

companies. In 2011, due to rising inflationary

pressures, coupled with the tightening of

traditional instruments, the central bank also

used other measures to strictly control the

currency, it increased the tightening effects for

the 20% lower credit growth rate.

In 2012 and 2013, the central bank

continued to monitor credit growth, but at a

higher level of control than in the previous year.

This shows that even if the central bank pursues

an expansionary monetary policy, there is still

some caution about the risk of excessive credit

expansion. In 2014, the target set is the M2 have

increased by about 16-18% and the annual rate

of credit growth by 12-14%. In short, this was

the last time that the central bank and the

Ministry of Finance had to intervene through

flexible policy tools and efforts to implement the


136

government's macroeconomic objectives.

However, macroeconomic objectives, including

the objective of economic growth, are not

always possible for many objective and

subjective reasons.

CONCLUSION

After having applied changes in laws and

principles by monetary authorities, monetary

policy has become an indispensable tool in the

macroeconomic operator, its role for the

economy is becoming clearer and stronger.

Previously, monetary policy was not

really a policy, now its content, tasks and

objectives are clearly defined as successive stages

of socio-economic reforms in Vietnam's

economy progress. Although the Vietnamese

economy is not yet fully a market economy, an

appropriate monetary policy has been found to

adapt to the country's conditions. This is

reflected in the favorable macroeconomic

indicators that Vietnam has achieved over 20

years and through creative adaptation to real

situations.

It has been built a favorable regulatory

environment, realized the role and motivation,

premises of the legal environment in the

innovation of monetary policy, currency system

- credit - bank. With experiences, exploitations,

capturing the reality signal, it was first set up the

basic elements of the abandoned legal

environment, from the birth of the two banking

ordinances with the first law to regulate legal

relations and commercial banks, the central

bank has evolved its laws. A first law on credit

institutions was adopted by Congress and

became effective on 1/10/1998. In recent years,

the introduction of the second law into banking

practices has focused on a new legal framework.

Money and banking transactions have

many remarkable achievements. A two-tier

banking system is now in place, the central bank

uses lenders of last resort, commercial banks

control borrowing and carry out banking

activities under the direction of the central bank.

The autonomy of the company and the

elimination of subsidies to banks are increasingly

reducing operating costs, in order to enable

companies to be more efficient. The bank has

updated a large number of innovations, bringing

new technology into operational management as

well as the construction of a payment system

through modern computer networks. This is

considered a positive step towards transforming

the quality of money and banking operations in

Vietnam.

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